Steve writes editorials for each issue of Forbes under the heading of “Fact and Comment.” A widely respected economic prognosticator, he is the only writer to have won the highly prestigious Crystal Owl Award four times. The prize was formerly given by U.S. Steel Corporation to the financial journalist whose economic forecasts for the coming year proved most accurate.

In both 1996 and 2000, Steve campaigned vigorously for the Republican nomination for the Presidency. Key to his platform were a flat tax, medical savings accounts, a new Social Security system for working Americans, parental choice of schools for their children, term limits and a strong national defense. Steve continues to energetically promote this agenda.

Congress Kills Wall Street, Here's How To Use That To Make Money!

Eric Singer is the portfolio manager of the Congressional Effect Fund, a mutual fund based on his theory regarding the general effects of Congress on daily stock prices. Recently, I sat down with Singer to talk about how to profit from an over-eager Congress and how he would fix the state of our legislative branch. Video and a transcript of our conversation follows.

Steve Forbes: Eric, good to have you with us. First of all, define what the Congressional Effect is. You discovered first as a lark and then it turned into something serious, into a full-blown book available on Amazon.

Eric Singer: Well, the Congressional Effect is the impact that Congress has on the stock market. It’s usually, but not always, harmful. What happens when they’re in session is that you have 535 members of Congress, each of whom is an issues entrepreneur trying to come up with something new to get attention.

Forbes: Is issues entrepreneur a polite way of saying press hog?

Singer: Yes, it probably is. Each one of them has an idea: We need to regulate healthcare more, whatever the latest problem is, we need to do something about it. And whenever they try to do something about it, they change the rules for an industry. They change the rules for the banking industry, or the healthcare industry, or the coal industry or the student loan industry.

Each one of these industries, the moment it becomes aware that there might be a change, buyers have to think about, “Well, how does that affect the value of this stock?”

It turns out that people sometimes don’t get to choose the day they have to sell a stock. Their daughter’s getting married. They’re getting divorce. They need to buy a house. Whatever day it’s due, they have to sell. But if they get money – if they got a bonus, they win the lottery – when they get the money, their advisors might say to them, “We really don’t understand what’s going on under Dodd-Frank yet. Hold off on buying the banks.”

It turns out that the Congressional Effect – and it goes back well over 100 years, in my work it goes back to 1965, day-by-day, representing 12,000 trading days – on the 7,900 days that Congress was in session, the market went up less than 1% annually. And on the 4,100 days they were on vacation, it went up 16% annually. That’s the Congressional Effect on a daily basis.

Forbes: And have you ever been able to figure out what specific things Congress does? I mean, a couple of days ago Congress was in session doing their mischief and for a couple days the market went up. Day to day, you can’t do it? Is it just a long term thing, or what?

Singer: It’s a long term thing. As I point out in the book, I’ve done it as an approach over the last nearly six years. I’m about a little over, and pretty close to, the S&P, net of fees, net of trading, out of all the stuff that you do on cumulative basis,

This is a discipline that I’ve grown into. It has a core problem, when I talk to financial advisors, because they say, “It’s just too easy. How am I going to tell my clients I’m dong something that’s so simple?” I try to only invest on days that Congress is on vacation.

Forbes: So what Mark Twain said – “No man’s life, liberty, or property is safe while Congress is in session” – has validity?

Singer: Yes, almost everything he said about Congress has validity. He also said that, “It could probably be proven by facts, statistics and otherwise, that there is no distinctly native criminal American class except for Congress.”

Forbes: So, when you do this, the mechanics – do you buy an S&P index?

Singer: I buy index-related securities. And to achieve neutrality when they’re in session, on days like today, I will be short S&P futures that offset the index securities that I own. That’s how I get to be neutral on days that they’re in session. When they’re on vacation, I’m just long on those index securities.

Forbes: So, you don’t sell the securities when they’re in session?

Singer: I get a little bit of dividend pick up from doing that. I may start to try to do a little bit more with yield securities and capture the price differentials with futures. Mechanically, I’m a very, very simple fund.

Forbes: What about days – that I guess we’ll get more of with this president – where Congress says they’re in session, and he says they’re not and he makes recess appointments? What would you call those?

Singer: There are always new cases. I try to look at days that Congress, if Congress has announced that they have a pro forma session – the president said, “Well, you know, you had a pro forma session, and you weren’t really meeting, and so therefore I’m going to go ahead and make my appointments.”

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